This dispute centers around the interpretation of an exclusion
in a directors' and officers' liability policy. Both the
insured and the insurer have moved for summary judgment. The
insured, a company and its directors and officers (referred to
collectively as "Alfin"), seek, inter alia, a declaration
that the exclusion in issue does not exclude coverage for
certain lawsuits against the company and its officials.

BACKGROUND

The following facts are distilled primarily from the parties'
statements pursuant to Civil Rule 3(g) of the United States
District Courts for the Southern and Eastern Districts of New
York ("Rule 3(g) Statement"). We observe that Alfin moved for
summary judgment first, submitting a basically useless Rule
3(g) Statement in that it does not set out a "short and concise
statement of the material facts as to which [it] contends there
is no genuine issue of material fact to be tried." Civil Rule
3(g) of the United States District Courts for the Southern and
Eastern Districts of New York. Instead of setting out the
facts, Alfin's statement simply declares that certain documents
exist and are appended to certain affidavits. We would like to
make it clear that such a submission will not be countenanced
in the future. Furthermore, we note that Alfin also did not
submit, in accordance with the local rule, a statement
controverting the Rule 3(g) Statement by defendant Pacific
Insurance Co. ("Pacific") on its cross-motion for summary
judgment. Accordingly, we have deemed "admitted" all of the
material facts as set forth in Pacific's Rule 3(g)
Statement.*fn1

In September of 1983, Alfin*fn2 made an initial public
offering of its stock. In connection with this offering. Alfin
obtained through the United States Fire Insurance Company a
policy of insurance protecting it in the event of claims based
on omissions or misrepresentations in the offering materials.
In late 1983, Alfin desired to purchase a directors' and
officers' liability insurance policy ("D & O policy"). Alfin
obtained proposals for such policies from three insurers —
National Union Fire Insurance Company, Federal Insurance
Company and the defendant Pacific. The proposals from National
and Federal called for higher premiums than the proposal from
Pacific. National offered a $3 million policy at a 1-year
pre-paid premium of 9.100. Federal quoted a $3 million 1-year
policy at a premium of $11,250. Both of these proposals
indicated the following exclusion from the coverage offered:

Special Exclusion for any claims based upon or arising out of
the public offering of stock to the general public through
Ladenburg, Thalman & Co., Inc., as provided in the Preliminary
Prospectus dated August 3, 1983.

By contrast, the proposal from Pacific quoted a $3 million
policy at a 3-year prepaid premium of $7,108. Under the
conditions of the policy, as listed in the proposal, the
following condition is listed:

IN CONSIDERATION OF THE PREMIUM CHARGES, IT IS UNDERSTOOD AND
AGREED THAT THE COMPANY SHALL NOT BE LIABLE TO MAKE ANY PAYMENT
IN CONNECTION WITH ANY CLAIM OR SUIT, INCLUDING BUT NOT LIMITED
TO SHAREHOLDERS' DERIVATIVE AND/OR REPRESENTATIVE CLASS ACTION
SUITS, BASED UPON OR ARISING OUT OF ANY OFFERING OR SALE OF
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO THE FEDERAL
SECURITIES ACT OF 1933 AND OR THE FEDERAL SECURITIES OF 1934
AND AMENDMENTS THERETO.

It is the interpretation of this exclusion that is at the crux
of the lawsuit.

Currently pending against the plaintiffs in this District are
three putative class actions, Hemming v. Alfin Fragrances,
Inc., et al., (S.D.N.Y. No. 86 Civ. 2563 (LBS)); Ryback v.
Alfin Fragrances, et al., (S.D.N.Y. No. 87 Civ. 4353 (LBS));
Antwiel v. Alfin Fragrances, et al., (S.D.N.Y. No. 88 Civ.
0525 (LBS)). Each of these actions alleges violations of
Section 10(b) of the Securities Exchange Act of 1934, and Rule
10b-5 promulgated thereunder. The named plaintiffs in each of
the suits purchased shares of Alfin not from the initial public
offering but on the open market of the American Stock Exchange.
Plaintiffs retained counsel to defend these actions, then
requested that Pacific cover the attorneys' fees pursuant to
the D & O Policy. Pacific advised Alfin of the former's belief
that these lawsuits "[fall] squarely within the ambit of
Exclusion 6" and, therefore, that "any liability that either
Alfin or its officers or directors may incur as a result of the
Hemming, Ryback, and Antwiel claims falls outside the scope
of coverage afforded by" the Policy. Affidavit of Kenneth I.
Schacter ("Schacter Moving Aff."), sworn to on November 3,
1989, Exhibit C. In light of this disclaimer of coverage, Alfin
filed this declaratory relief action. In the meantime, Alfin,
which is permitted pursuant to Section 6.06 of its bylaws to
indemnify its officers and directors to the fullest extent
permitted by law*fn3 for claims
arising out of civil or criminal actions or proceedings in
connection with their service as an officer or director of
Alfin, has incurred significant attorneys' fees and expenses in
the defense of these three actions.

In an extremely comprehensive and insightful opinion. Judge
Weinstein of the Eastern District of New York, expounded on the
tensions between the Federal Rules of Civil Procedure,
specifically those relating to summary judgment, and the
substantive state law of contracts. Uniroyal, Inc. v. Home
Insurance Co., 707 F. Supp. 1368, 1372-78 (E.D.N.Y. 1988).
Judge Weinstein explained that under the federal rules, which
provide a proceduralist view, "ambiguity inherently
necessitates a full presentation of extrinsic evidence for the
factfinder's evaluation." Id. at 1373. On the other hand,
under state law, "ambiguities in an insurance policy are to be
construed by the court against the insurer." Id. Judge
Weinstein held that "the proper resolution under federal
procedure and New York law is that summary judgment is proper
on an ambiguous insurance policy when, after having allowed
full discovery and found no valuable extrinsic evidence of the
parties' intent, the court applies as a last resort the state
law presumption construing the policy against the insurer."
Id. We agree with this thoughtful analysis and we adopt it
here.

B. New York Contract Law

Under New York law, an insurance policy is a contract "which,
like any other contract must be construed to effectuate the
parties' intent as expressed by their words and purposes."
American Home Products Corp. v. Liberty Mutual Ins.
Co., 565 F. Supp. 1485, 1492 (S.D.N.Y. 1983), aff'd as
modified, 748 F.2d 760 (2d Cir. 1984) ("AHP"); IBM
Poughkeepsie Employees Federal Credit Union v. Cumis Ins.
Soc'y, Inc., 590 F. Supp. 769, 772 (S.D. N.Y. 1984). An
insurance contract must be read as a whole to determine what
the parties reasonably intended by its terms. Newmont Mines,
Ltd. v. Hanover Ins. Co., 784 F.2d 127, 135 (2d Cir. 1986).
"No construction of an ambiguous provision is permitted that is
inconsistent with the contract's plain meaning or with the
parties' clear intentions . . . . To disregard express language
in an insurance contract because of claimed ambiguity would
violate the more fundamental rule of construction' that
requires a court to construe the contract as a whole, and
whenever possible to give effect to all of its parts." AHP,
565 F. Supp. at 1492 (citation omitted).

The threshold question of whether a policy is clear or
ambiguous is a question of law. Tokio Marine & Fire Ins. Co.
v. McDonnell Douglas Corp., 617 F.2d 936, 940 (2d Cir. 1980);
Uniroyal, supra, 707 F. Supp. at 1375. The Second Circuit has
ruled that in insurance disputes an "insurer bears a heavy
burden of proof, for it must `"establish that the words and
expressions used [in the insurance policy] not only are
susceptible of the construction sought by [the insurer] but
that it is the only construction which may be fairly placed
upon them."'" Vargas v. Insurance Co. of North America,
651 F.2d 838, 840 (2d Cir. 1981) (emphasis in original) (quoting
Filor, Bullard & Smyth v. Insurance Co. of North America,
605 F.2d 598, 602 (2d Cir. 1978), cert. denied, 440 U.S. 962, 99
S.Ct. 1506, 59 L.Ed.2d 776 (1979) (in turn quoting Lachs v.
Fidelity & Casualty Co. of New York, 306 N.Y. 357, 365-66,
118 N.E.2d 555, 559 (1954))). The insurer is "`obliged to show (1)
that it would be unreasonable for the average man reading the
policy to [construe it as the insured does] and (2) that its
own construction was the only one that could fairly be placed
on the policy.'" Vargas, 651 F.2d at 840 (quoting Sincoff v.
Liberty Mutual Fire Ins. Co., 11 N.Y.2d 386, 390, 230 N.Y.S.2d 13,
16, 183 N.E.2d 899, 901 (1962)).

Viewing the policy from the vantage point of the "reasonable
expectation and purpose of the ordinary businessman," Avondale
Indus., Inc. v. Travelers Indemnity Co., 697 F. Supp. 1314,
1319 (S.D.N.Y. 1988), aff'd, 887 F.2d 1200 (2d Cir. 1989),
rehearing denied, 894 F.2d 498 (2d Cir. 1990), petition for
cert. filed, April 10, 1990, we do not believe that it is
unreasonable for Alfin to construe the policy as it does. The
manner in which the exclusion is drafted admits of ambiguity
such that the interpretation proffered by Alfin is at least as
plausible as that proffered by Pacific without resort to
extrinsic evidence. Accordingly, as the insurer's
interpretation is not the only reasonable and fair construction
as a matter of law, we must look to the extrinsic evidence
submitted by the parties. Uniroyal, supra, 707 F. Supp. at
1374-75; Ploen v. Aetna Casualty and Surety Co., 138 Misc.2d 704,
525 N.Y.S.2d 522, 524 (Sup.Ct. 1988).*fn4

Once extrinsic evidence is admitted, two results may ensue: (1)
that the extrinsic evidence offered raises a question of
credibility or presents a choice among reasonable inferences;
and (2) that the extrinsic evidence offered fails to raise
credibility of such a choice. Uniroyal, supra, 707 F. Supp. at
1374-75. Under New York law, the first situation requires a
submission to the factfinder while the second situation, like
the case when no extrinsic evidence is offered, mandates
construction by the court as a matter of law. Id.; see also
Board of Educ. v. CNA Ins. Co., 647 F. Supp. 1495, 1502
(S.D.N.Y. 1986) (ambiguous provisions are to be construed by
the court "unless determination of the intent of the parties
depends on the credibility of extrinsic evidence or on a choice
among reasonable inferences . . .'") (quoting Hartford
Accident & Indemnity Co. v. Wesolowski, 33 N.Y.2d 169, 171-72,

To sustain the argument that Alfin had to know of the meaning
attached by Pacific, Pacific points to the existence of the two
other D & O proposals containing specific exclusions for claims
flowing from Alfin's 1983 initial public offering as well as
the lower premium level quoted by Pacific. To demonstrate that
it did not know of the meaning attributed to the clause by
Pacific nor was it on notice of such a meaning due to the
differentials in the premiums, Alfin submitted deposition
testimony as well as affidavits. First, there is the affidavit
of Alfin's insurance broker that no one from Pacific told her
of Pacific's "intention to exclude all claims flowing from the
federal securities laws from the policy's protection."
Affidavit of Phyllis Popper ("Popper Aff."), sworn to December
20, 1989, at ¶¶ 5, 8. Ms. Popper also states that the fact that
a lower premium was quoted on the Pacific proposal did not
necessarily indicate that the scope of the coverage offered was
less than that of the other proposals as the insurer could have
had other motivations, such as trying to obtain the insured's
business, for quoting a lower premium. Id. at ¶¶ 6 & 7. This
statement is also confirmed by the deposition testimony of
Charles Bertenthal, another insurance broker who also
represented Alfin, wherein Mr. Bertenthal testified that often
there was no linkage between premium level and policy coverage.
Deposition of Charles Bertenthal, sworn to August 23, 1989 at
27 (Annexed to the Affidavit of Kenneth I. Schacter ("Schacter
Reply Aff."), sworn to December 22, 1989 as Exhibit C).
Finally, there is the deposition testimony of Alfin's Chief
Operating Officer and Treasurer, Sam Reich, that Alfin's intent
was to obtain "the broadest coverage possible" and that the
company "wanted to be covered for everything," and that it was
Alfin's understanding that "we
should be covered for everything and anything." Deposition of
Sam Reich at 19, annexed to the Schacter Reply Aff. as Exhibit
B.

The parties are directed to submit a joint pre-trial order by
May 1, 1990 and the matter will be placed on the Court's
readytrial calendar as of May 15, 1990.

SO ORDERED.

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